Slumdogs vs. Millionaires

Although it's hard to believe, Wall Street's Gucci-wearing financiers actually have quite a bit in common with slum dwellers in Kenya and Mumbai at the moment—they're both mired in shadow economies, where basic facts like who owns what are nearly impossible to determine. That murkiness, says Peruvian economist Hernando de Soto, is the source of the continuing credit crunch gripping New York, London and other financial capitals, and a basic fact of life for much of the developing world. (Read de Soto's article on the subject here. De Soto, who now runs the Institute for Liberty and Democracy, a global think tank, spoke with NEWSWEEK's Barrett Sheridan from his office in Lima. Excerpts:

NEWSWEEK: Your bestseller, "The Mystery of Capital," tackles the idea of property rights and their impact on economic development.
Hernando de Soto: What makes a market economy possible is that people are able to find out facts about each other and about their enterprises in spite of the fact that they don't have direct physical contact. So the question is, how do you get to know things? How do you get facts? You will find out that most of the facts you want are in property papers. One of the things that developing countries miss is that close to 80 percent of their enterprises are actually not fully recorded as property.

And the simplest way in which this idea takes shape is that a lot of poor people in the developing world don't have deeds to their houses.
They don't have recorded deeds. They may actually have a deed, but it's not in the knowledge system, therefore you can't read about it.

So this knowledge of who owns what is not standardized.
It's not standardized and it's not distributed. I may have a manuscript here that actually says—from the King of Spain—that ever since the Spaniards landed in Peru, I own this land. But you may not know about it unless I record it.

Why does ownership matter so much?
Ownership means that I have something to lose. If you're a banker, it means that you've got collateral. It also means that I'm credible, so you can give me credit. When you think about it, whether it's ownership, whether it's credit, whether it's capital, whether it's identification, none of the things that make a modern economy are possible without property.

How does this relate to the financial crisis?
The enormous amount of derivatives that had poured into the market—there are close to $600 trillion of these papers around—are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.

So they're unidentified in the same way that ownership of, say, a slum in Peru or Africa is unidentified.
That's right. We have worked in places like Tanzania and Egypt and Ethiopia. When you go visit a home there you don't find justification for it through the books. In other words, it's not centrally available information. When you talk about shadow economies in many places, it's not only the economy of gangsters. It's also economies that are legal in every respect except for the fact that the paper, which backs up the ownership or the evidence that something exists, is not easily and publicly available. That creates the shadow.

Has the subprime mortgage market become a shadow economy?
Subprime mortgages are not a shadow economy. But what happened is that a lot of these mortgages got repackaged into securities. Then they became collateralized debt obligations and some of these mortgages were sliced and diced and put into tranches. When some of these mortgages went sour and people started defaulting on their payments, then of course a lot of the securities tied to them also started defaulting. But when you try and trace who's ultimately responsible for the value of that paper, you couldn't find it. That's the part of the market that has become the shadow.

So basically ill-defined property rights in the subprime mortgage sector caused a meltdown. Does the same happen in the developing world?
Yes. That shadow hopefully is a temporary condition in the United States and in Western Europe. And it might pass in a year or 10 years, but it will pass. That passing condition that's occurring now in developed countries, that's a chronic condition in developing countries. We're always chronically in credit crunches—because you don't know who owns what, nobody dares lend to somebody else. Bringing the law to emerging markets is possibly the most important measure that can be taken to help these countries become rich. Look at the Iranians, look at the North Koreans—they're building nuclear plants. Look at the computer—they're being built in northern India. The issue isn't the expansion of technology. We can all get it, borrow it, buy it or steal it. The issue is how do you get a legal system that allows people to cooperate so as to create more complex systems and objects.

So at this point, a Wall Street banker in a $10,000 suit is encountering basically the same problem that Nairobi slum dwellers have had to deal with for decades or more.
Absolutely. The difference, however, is that in Nairobi they are still struggling to understand that a property system is the best way that they can do things. In the United States, every piece of land, every house, every automobile, every airplane, every manuscript for a film, every patent is written up and recorded and described. There's only one thing in the United States which is not recorded in such a way and that's derivatives. We're only talking about 7 percent of the subprime market being in default, yet it is causing a major contraction in your economy. You're not getting your credit flowing because you don't know what is where and who it belongs to.

What's the answer? How do we assign "property rights" to derivatives?
The banks and the holders of all of these instruments have got to report them in such a way that your government and the public knows who owns what and where. Once the light shines, you will know who's solvent, who's insolvent. You'll be able to have a clean debate as to who to help and who not to help. And you're going to have a much better idea of the consequences of not helping or helping. Right now you're talking about all of those issues, but you still don't have the facts. So the first thing is to have the law require those people who own these things to fess up.

It sounds so simple when you put it like that, but I guess there are special interests blocking that from happening.
I am convinced that there are special interests. Creating property rights in the United States [was much easier to do], because a lot of the land, the assets, the woods and the rural areas actually belonged to nobody, or they belonged to indigenous people or Mexicans. But in Britain, those who owned property were able to resist registration throughout part of the 19th century. They even argued that public knowledge of who owned what could eventually lead to kidnappers or things of that kind. And they managed to avoid the light being shined [up until 1925]. The fact is that a market economy works on information. If you don't have the facts, you don't have a market and you can't have justice.

Have we in the West forgotten that?
Einstein was credited with having said, "What does the fish know about the water in which it swims?" You've got to be a human being and look at it from the outside—then you'll understand why the fish lives where it lives. So I think what's happened is that Westerners got property [rights] very early on, about 200 years ago if you're American, and you've grown accustomed to it. You're the fish in the water.

© 2009
Member Comments
Report Abuse Reply Posted By: lawyerinperu @ 03/23/2009 11:34:43 PMDear Sir.
My compatriot Hernando de Soto is right much like my countrywoman Mrs Carmen Rhor that comments the note; nevertheless I would add that all this is the old history of the powerful ones that privatizes the gains but they socialize the losses. In the measurement that advance in the democratization of the society where all are really equal before the Law and where each individual can obtain its place under the sun, even though with economic differences; it will be possible to be developing one more a happier society.
Alonso Sarmiento
http://alonsosarmiento.googlepages.com

Aquaculture May Replace Wild Fish Stocks

A new report from the United Nations notes that farmed fish are beginning to make up for the decline in wild catches
By Nathanial Gronewold

UNITED NATIONS — The U.N. Food and Agriculture Organization (FAO) released its latest report on global fisheries and aquaculture with no new 2008 catch and production figures, as the agency continues to piece together 2007 data.

Nevertheless, FAO is sounding an alarm on gradual declines in wild catch fishing production and depletion of stocks, while being careful to note that growth in the global aquaculture industry is largely making up the difference and seems poised to overtake capture fishing as the world's leading source of seafood.

Efforts to reduce the overcapacity in fishing fleets, fed by generous subsidies from European and Asian nations, have failed, and progress toward reversing the depletion of the ocean's resources is too slow, the agency warns.

FAO is also warning governments to do more to understand the likely effects of climate change on fishing and how best to adapt to the challenge.

The most recent data suggest that the vast majority of the world's wild fish stocks either are being overexploited or have reached their maximum productive capacity as fishing fleets have expanded and moved into previously untapped regions of the seas. Twenty percent of fish stocks have room to grow, according to the latest available data.

"Overall, 80 percent of the world fish stocks for which assessment information is available are reported as fully exploited or overexploited and, thus, requiring effective and precautionary management," FAO says in its report.

The northeast Atlantic Ocean is among the regions suffering from the highest numbers of overexploited stocks, the report says. That area is home to a popular bluefin tuna fishery, where European fleets have been openly breaking their catch quotas for years.

The West Indian Ocean and Northwest Pacific fisheries also suffer from overfishing.

Trends in the data from 2005 to 2006 suggested that the condition of the world's wild fish stocks is worsening, and most observers widely expect 2007 and 2008 figures to show the same. But FAO officials in Rome say they are still in the process of simply gathering 2007 numbers and have yet to request catch figures for last year, a reflection of constraints on time and manpower at the fisheries and aquaculture department.

"You're talking about a huge amount of data," said FAO spokesman George Kourous. "Not all countries are in a position to report it in real time. Often, it gets reported in mixed formats or with different measures."

Still, China likely retains its top spot in wild-fish production, with 17 million metric tons during 2006. Peru and the United States round out the top three, at 7 million metric tons and 4.9 million metric tons, respectively. The northwest Pacific Ocean is the world's most productive fishery, supplying the world with 21.6 million metric tons in 2006.


Early 2007 data suggest worldwide production from capture fisheries, excluding China, had risen by at least 3 percent in 2007. Last year, China revised downward its 2006 catch figures by 2 million metric tons, citing enhanced data collection, throwing into doubt its 2007 reported catch numbers.

Anchoveta, Alaska pollock and skipjack tuna are the world's most heavily exploited wild fish species. Capture fisheries production has largely stayed the same over the past few years, rising and falling between 90 million to 94 million metric tons annually, hitting 92 million metric tons in 2006. Ebbs and flows in the catch numbers can largely be explained by the El Niño weather phenomenon, which has a strong effect on Peruvian anchoveta, Kourous explained.

But the world's three largest fisheries could now be feeling the effects of depletion due to overfishing. Last year, the National Oceanographic and Atmospheric Administration closed the Alaska pollock season early after alarms were raised over low catch numbers, sending prices for the fish spiking temporarily.

Aquaculture rising FAO figures show that aquaculture's share of the global fish industry continues to rise, with China leading the surge.

"After growing steadily, particularly in the last four decades, aquaculture is for the first time set to contribute half of the fish consumed by the human population worldwide," said Ichiro Nomura, assistant director general of FAO's fisheries and aquaculture department. "This reflects not only the vitality of the aquaculture sector but also global economic growth and continuing developments in fish processing and trade."

In 2006, China grew 34.4 million metric tons of fish on farms, far outstripping the 17 million metric tons that nation caught on the open ocean. China accounts for roughly 66 percent of the world's total aquaculture production in tonnage, and that country exported $9.3 billion worth in 2007.

Worldwide aquaculture has grown on average by about 6.9 percent annually in recent years. FAO estimates that the industry expanded by a further 7 percent in 2007, but 2008 production growth numbers could be affected by worsening economic conditions later that year. FAO had already earlier reported that growth in aquaculture in China appears to be leveling off.

Reprinted from Greenwire with permission from Environment & Energy Publishing, LLC. www.eenews.net, 202-628-6500

Comentario
Dear Sir.
In Peru, my country, there is the problem of the excess of warehouse, that is to say, an amount of fishing boats far beyond the possibilities of the biomass. Even though periods of prohibition in the fishing settle down, this comes causing the ruin from many artisan fishermen and the depredation of our sea blessed by the cold current of Humbolt.

Alonso Sarmiento